Consumer Credit

Student Debt, the New Home Equity Loan

Consumer credit is on a tear. In January (the latest data available), consumers borrowed $17.8 billion, bringing outstanding consumer debt to $2.51 trillion. That’s the biggest three-month gain in more than a decade. Greater borrowing could be a good sign, showing that consumers are more confident—the magical emotion that can spur spending and help the economy rebound. But Dan Alpert, managing partner at Westwood Capital, a boutique investment bank, says not to start welcoming the “confidence fairy” yet. As he reads the numbers, something more troubling is going on.

While retail sales are slightly up, Alpert says that if the borrowing binge were driven by confidence, people would be spending at much faster rates. “You see this enormous growth in credit but you don’t see enormous pick-up in consumption,” he says. New data today from the Conference Board show that consumer confidence slipped slightly in February and is around the same level as a year ago, despite the big increase in borrowing. Alpert says people don’t have many reasons to be optimistic. Unemployment is still above 8 percent. And when people do get new jobs, they often don’t earn as much as they did before they were out of work—or even much more than they received from unemployment benefits.

“The dramatic rise is that people who had cash saved up for their kids’ education are finding themselves in a more difficult situation,” he says, because families now need to dip into education savings to make ends meet. Where they met shortfalls in the past by taking out home equity lines of credit, families now are turning to student loans. Nearly every student qualifies for the loans—Alpert calls them practically a “birthright” in the U.S. “They are effectively financing where financing is easiest to get,” he says.

The Federal Reserve doesn’t break out student debt in its monthly releases, but does say that “non-revolving” lines of credit—largely student and auto loans—now make up 68 percent of outstanding consumer debt. The Consumer Financial Protection Bureau estimates that student debt now tops $1 trillion, which is more than all the credit-card debt in the country. The CFPB points out that the growth in student loans reflects not just new origination, but also that some graduates can’t keep up payments. We recently reported that as many as 27 percent of borrowers are already late on their student loans.

Heavy student debt can cause a host of problems. On a personal level, debt burdens may affect future marriage and fertility rates. In the broader economy, heavier debt loads can drive down spending “as the present cohort of students enter their prime consumer years,” Alpert wrote in a blog post on EconoMonitor. There, he presents a graph that shows how the current divergence between borrowing and spending resembles how people acted before the crisis in 2008, when consumers took out loans (often through home equity lines of credit) just to pay down their other debts. Alpert says he’ll be watching retail sales trends in the next few months to see if the pattern continues. Last time, it proved dangerous and unsustainable.